Will We Double-Dip?

The two sides of the debate are worth consideration.

The latest controversy likely to cause debate at your next strategic planning meeting is whether the U.S. economy will fall into a double-dip recession. Some experts predict the economy will continue to recover and then mature into an economic expansion.

Why the debate? The economy expanded at only 1.6% in the second quarter, according to the Bureau of Economic Analysis. This is significantly below the 3% level considered necessary to absorb new labor force entrants. Growth above 3% is required to reduce the unemployment rate.

Double-dippers point to weak fundamentals curtailing consumer spending, which makes up nearly 70% of economic activity. These include falling total employment during the third quarter, increasing unemployment insurance claims, low income growth, an unemployment rate increase to 9.6% in August, low and volatile wealth, limited consumer access to credit, decreasing consumer lending, and low consumer confidence. In addition, home buyer tax credits shifted retail sales and appliance sales into the first half of the year.

The next biggest sector of the economy—government—makes up 19% of total spending. Double-dippers focus on state and local governments’ shedding of 10,000 jobs in August, necessitated by balance budget laws, and federal stimulus spending slowing in the second half. Recoverians retort that federal government hiring is increasing and spending grew at a 9% annualized rate in the second quarter.

Recoverians point out the worldwide economic recovery boosted U.S. exports by a 10% annualized rate in the second quarter. But double-dippers stress imports increased even faster—by 29% in the second quarter—making net exports a negative for economic growth.

Business investment spending also is producing mixed signals. Increasing profits and slowing worker productivity are harbingers of increased future hiring. But uncertainty about new legislation and future taxes is stalling business investment spending.

What would a double-dip recession look like? Don’t expect additional monetary and fiscal policy. Record low interest rates and record high deficits limit any additional stimulus.

Expect unemployment to increase above 11%, home prices to fall another 10%, and housing construction to implode. Expect recent improvements in loan quality to deteriorate, with delinquency rates climbing above 2%. Loan demand would fall, and the national savings rate would increase.

The last time the U.S. economy experienced a double-dip recession was from 1980 to 1982. Let’s hope history doesn’t repeat itself.